Western Union has 515,000 agents in 200 countries, giving it huge economies of scale. The Times Square branch is a popular destination for travelers.
Eduardo Munoz/Landov

Western Union's first-quarter earnings, although depressed, beat analysts' estimates, propelled by a 9% uptick in transaction volume in the critical Mexican market. CEO Hikmet Ersek said on the company's earnings conference call that "pricing actions are working as planned," and that Western Union expects to "exit 2013 with strong momentum."

That could be welcome news to the company's long-suffering shareholders, who have seen the stock (ticker: WU) slide to a recent $16 from a high near $30 in mid-2008. If the business grows, as expected, the shares, too, could gain momentum, and advance to $19 or so. Add a 3.1% dividend yield, and investors could enjoy a total return of almost 21% in the next 12 months.

WESTERN UNION WAS FOUNDED as a telegraph operator in 1851, and spun out of First Data in 2006. The Englewood, Colo., company generated 74% of last year's $5.7 billion in revenue from money-transfer fees, mostly from its consumer-to-consumer business, which primarily serves under-banked immigrants remitting funds to folks back home. The average transaction involves $341, on which it charges a fee of up to 5%. Western Union also offers bill payments via its consumer-to-business unit, and facilitates cross-border payment services among businesses.

Western Union processed $71 billion of cross-border transactions in 2012, although its market share slipped to 15% from 17% the prior year, according to Aite Group, a research firm focused on the financial-services industry. Rival
MoneyGram International MGI -0.9009009009009009%MoneyGram International Inc.U.S.: NasdaqUSD8.8
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Volume (Delayed 15m)
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73220
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8.320754716981131Market Cap
471181693.389244
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N/ARev. per Employee
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(MGI), with 5% of the market, has been grabbing share by charging less, and Chief Financial Officer Alex Holmes says the company is "confident we are well positioned to continue to increase market share globally."

Western Union has faced regulatory issues, too. It settled a suit in 2010 with Arizona, which charged that the company hadn't done enough to catch and curb illegal money-transfer activities along the state's border with Mexico. Last year, Western Union cut ties to 7,000 agents in Mexico who failed to meet compliance standards.

Yet, Western Union's trusted name and installed base of 515,000 agents in 200 countries give it a wider moat than its market valuation suggests, and unmatched economies of scale. Moreover, the company is investing heavily in digital money transfer, to keep pace as the industry moves online. Management, which was unavailable to comment, has said that Western Union is on track to boost digital revenue to $500 million by 2015 from $150 million now.

Western Union

Recent Price

$16.10

12-Month Total Return

-3.8%

Market Val (bil)

$9.0

EPS 2013E

$1.41

PE 2013E

11.4

Dividend Yield

3.1%

E=Estimate Source: Thomson Reuters

Investors aren't paying much for Western Union these days, but could be getting more than they realize. The stock trades for 11 times this year's expected earnings of $1.41 a share, and 10 times next year's forecast of $1.59. The company lowered revenue and profit guidance in October, sparking a selloff in the shares, and said in February that 2013 earnings guidance could fall to a range of $1.33 to $1.43. Western Union earned $1.74 a share in 2012.

James Kenny, an analyst at Ariel Investment in Chicago, expects Western Union to trade up to the low $20s in the next few years, as unemployment levels fall around the world. "No one is better positioned to benefit from this long-term, secular trend," he says.

In the near term, the company could get help from a stronger housing market, which relies on immigrant labor.

The Bottom Line

Western Union shares could rally to $19 in the next 12 months, and to the low $20s thereafter, as the economy improves and transaction volume grows. The shares yield 3.1%.

Bryan Keane, an analyst at Deutsche Bank Securities, sees a 2% uptick in revenue next year in Western Union's consumer-to-consumer business, and a 7% rise in business-to-business, helping drive total revenue to $5.6 billion. "We expect Western Union's pricing actions to result in share gains, as the company further penetrates new distribution channels such as mobile and online," he wrote recently.

But skeptics like Goldman Sachs analyst Julio Quinteros had the upper hand until recently. "Limited visibility on whether transactions stick into 2014 and beyond keep us guarded," Quinteros wrote in a recent report. He has a Sell rating on the stock, and a price target of $13.

WESTERN UNION GENERATED an average of $1 billion in free cash flow in each of the past three years, and expects free cash to total $900 million this year. It plans to use most of the funds to pay the dividend and buy back shares. Last October, at the same time it lowered earnings guidance, the company announced a 25% dividend increase, to 50 cents a share, and approved a new buyback program of $550 million. It has reduced the share count by more than 20% since 2006, spending $4.3 billion to buy in stock.

Seizing on the weakness in the shares, several insiders also picked up stock last fall, including three directors and Ersek, the CEO, who purchased 8,060 million shares in early November for $12.36 apiece. The insiders are looking smart so far, and even more gains could come their way.